Post briefing, our concerns over the huge slump in 4QFY20 margin for its construction division have been addressed – prompting us to see the dip in 4QFY20 as a one-off event. Replenishment and sales targets guided were also encouraging – all above our assumptions. With margin concerns addressed coupled with an impending recovery which will see all its segment performing stronger in FY21, we hereby upgrade WCT back to OP (from MP) with a higher TP of RM0.675 (from RM0.65).

Huge kitchen sinking done in 4QFY20 which saw huge impairments worth RM175m mainly coming from its: (i) hotel assets, (ii) retail malls and (ii) existing unsold properties. During the quarter, WCT also seized the opportunity to revise contract margins lower for all their ongoing projects which explained the huge slump in 4QFY20 construction EBIT margins (to nil) as all prior earnings recognitions (which had higher margins) were subsequently reversed out. Moving forward, due to the revision, construction EBIT margins would trend lower between 5-8% vs. the 6-9% range previously guided.

Impairments to remain at bay. We believe further impairments are unlikely to recur in FY21 given the impending recovery. If any, we believe reversals and write-backs will materialise due to the severe write-down in 4QFY20.

Guiding for RM2b worth of replenishments backed by a tender-book of RM10b. The replenishment focus will largely come from East Malaysia (i.e. Sabah) with the eventual roll-out of contracts such as: (i) Pan Borneo highway and (ii) Sabah-Sarawak link road as the economy recovers from the pandemic. YTD, WCT has clinched RM140m worth of contracts and is currently awaiting an LOA (letter of award) for the expansion of Kota Bharu Airport worth c.RM400m. Subsequent to this, we conservatively increase our FY21E replenishment target to RM1.5b (from RM750m).

4QFY20 property sales of RM108m lifted FY20 property sales to RM350m – spot on our target. For FY21E, management is targeting RM1.0b worth of property sales broken into: (i) RM420m worth of completed inventories, (ii) RM170m for properties under construction, and (iii) RM410m from new launches worth RM1.7b. Despite the high target, we choose to stick to our RM550m sales assumption as we find the inventory clearance target of RM420m (against their total completed inventory of RM731m) slightly challenging.

Land sale gains higher than expected. Meanwhile, the two pending land sales worth RM134m expected to crystallise in 1Q21 will contribute c.RM80m to bottom-line according to management vs. our initial profit estimate of RM47m. Management has also indicated that they are in the midst of negotiating further land sales (in Sungai Buaya).

Earnings revision. After factoring for the higher construction replenishment and higher-than-expected land sale gains, we upgrade our FY21E/22E net profit by 36% and 6% to RM126m and RM91m, respectively.

Upgrade to OP (from MP) with a higher TP of RM0.675 (from RM0.65) based on unchanged FY21E PBV of 0.3x (-1.5SD). We reverse our downgrade in call yesterday as (i) our earlier margin concerns were addressed, and (ii) its share price dipped post results. We also believe the strong earnings to be registered this year will overwhelm the overhanging high debt level issue.

Source: Kenanga Research - 19 Mar 2021